Pensioners' winter fuel payments could be taxed under plans put forward by the Liberal Democrats in negotiations over this month’s Budget.

Business Secretary Vince Cable is pressing for the move as a compromise to the growing row over David Cameron’s pledge to protect benefits for wealthy pensioners.

His intervention came as Cabinet ministers continued to publicly campaign against further cuts, despite a warning from Treasury chief secretary Danny Alexander.

Compromise: Business Secretary Vince Cable is pressing for pensioners' winter fuel payments to be taxed

Mr Alexander has been angered by public opposition to cuts from the so-called National Union of Ministers, comprising Mr Cable, Defence Secretary Philip Hammond, Home Secretary Theresa May and Justice Secretary Chris Grayling. Yesterday he said that public disagreements were ‘no way to do business’.

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But minutes later Mr Hammond marched back to the Ministry of Defence and issued a fresh warning that the Armed Forces cannot take more large-scale spending cuts.

He said he understood Chancellor George Osborne’s spending ‘problem’, but added: ‘If we go beyond what can be delivered from efficiency, there will have to be a reassessment of the output that is delivered.’

David Cameron has vetoed the idea of means-testing pensioner benefits - including the winter fuel allowance worth £300 a year to the over-80s

Mr Cable, who is also opposing cuts to his department, has told colleagues it is ‘barmy’ to continue paying benefits to wealthy pensioners while squeezing the rest of the welfare budget.

The Prime Minister has vetoed the idea of means-testing pensioner benefits, which could raise £2billion a year, after repeatedly pledging he would protect them in the run-up to the election.

But Mr Cable is arguing that taxing the payments would allow the Government to claw back millions of pounds while technically meeting the pledge.

It would also avoid the need to introduce costly and bureaucratic means-testing. The winter fuel allowance is worth £200 a year, or £300 to the over-80s. Pensioners on higher-rate tax would lose £80 or £120 a year of their allowance.

Treasury sources last night poured cold water on the idea, saying it would raise relatively little money and be seen as a breach of the Prime Minister’s pledge. But the Lib Dems are determined to explore avenues for raising additional tax to fund more spending on infrastructure.

Senior figures are urging Mr Osborne to reconsider his opposition to imposing a ‘mansion tax’ on homes worth more than £2million.

In return, the Chancellor is pressing to have the vast welfare budget opened to further cuts. The Lib Dems blocked £6.5billion of cuts last year, including ending housing benefit for the under-25s and limiting child benefit payments to two children.

The Chancellor is also facing pressure from many Conservatives to use the Budget to signal a change of direction by ordering steep cuts in both tax and public spending, particularly welfare.

Former Tory Cabinet minister Lord Forsyth yesterday again urged Mr Osborne to revisit the lessons of Thatcherism and cut taxes to boost the economy. He said Britain appeared to have ‘slipped back to the 1970s and forgotten some important lessons’.